What Kind of Investment is Best for Beginners?
Currently, the world is going through Multiple Shock waves of Covid 19, War, Inflation, Quantitative tightening, and initial signs of a Recession. People may argue if it is fair to talk about Investment in Equity Market for beginners or not.
The initial reaction may be to protect yourself and your money; even many might think of selling the whole portfolio and leaving the market for good. But we fail to understand that even in adverse conditions, there are opportunities in the Equity market.
Do you Know? There is a saying that
"
Those who invest in bear markets reap the benefits in Bull markets. “
This doesn’t mean one has to throw oneself in one go, as you never know a bear market may last for more than one year.
So what should we do? An investor’s journey should be consistent and full of patience and discipline.
There are Two Types of Equity Investment
- Mutual Funds, which the beginners should prefer, and
- Direct Investments into Stocks.
Smart SIPing in Mutual Fund
Related: Struggling to Invest? Learn more about ‘Systematic Mutual Fund Investment Plan’ in India and Thank us later for that
Basic Requirements to start investing in the Indian equity market.
One would require a Demat account to start investing in the Indian equity market. We can make mutual fund investments by registering on the mutual fund websites along with KYC formalities or even through ISA (Investment services account) through your savings bank account.
Please note that when you invest directly through mutual fund websites, you save on commissions paid to banks and brokers. But for investments into stocks or ETF (Exchange traded fund), the Demat account is mandatory. One can choose from the top large reputed brokers in the country. These days account opening is online and takes less than 10 min; you need soft copies of your Pan Card, Aadhar card, photo, and signature. You would also require an active bank account linked to the Demat account. Once you set up the account, you can transfer money and start your investing journey. But it is advisable to go very slow in equity investing; believe me, you will not miss the bus.
But What about the Remaining 50-60% of your Savings?
Invest it in FD, RD, Bonds, liquid funds, or gold and relax. Use some of it in a volatile market when blood is on the street.
Stay away from thematic funds until you know the sector well and can identify the cycle. You would have never made good returns by SIPing in Pharma during 2014-15 and real estate and infra in 2005-07 as a down cycle followed for several years.
So SIP is not right in all situations.
Stay away from investment advisors who consistently advise SIP in thematic funds for the long term, especially when the sector has reached the cycle’s peak. Deep cyclical sectors, after they peak out, may take even ten years to return.
For example, Infra and Real Estate Cycle peaked during 2006-08. These companies remained down for a decade; only in mid-2021 did they improve.
Routes of Direct Equity Investment
If a person wants to take a relatively higher risk to get higher returns and is willing to spend at least a few hours per week studying the markets, they may directly invest in stocks.
Few Suggestion While Making Equity Investiment
- Do courses on equity investments from NSE or any reputed institutions. One source can be Zerodha Varsity modules which are free of cost. Click Here to know more.
- Non-finance people should study financial statement analysis to help determine which companies are in sound health regarding cash flow and balance sheets. There are several accessible sources, including from NPTEL, to know more.
- Read regularly good books and articles on equity investment.
- Initially, invest in stocks from the top 50 or 100 large companies known as Bluechips. One way is to periodically invest through SIP in selected stocks irrespective of the market level.
- The Investment should be after profoundly understanding the business and analyzing the financial statements.
- Respect valuations, investing in very high valuation stocks can be a loss-making affair most of the time. People who bought Infosys or HUL at peak valuations had to settle for very low or no returns for more than 8-9 years.
- Don't rush to invest in mid or small caps, and stay away from micro caps.
- Diversify your investments into at least 15 to 20 stocks, don't put all your eggs in one basket even if you are 100% sure about a few companies. Shit happens a lot in markets, and remember Videocon, Punj Lloyd, JP associates, Unitech, etc., which were market darlings, lost more than 90% of their value.
- Don't panic when the market is down, and don't get excited when the market is flying high. In the stock market stocks fluctuate constantly.
- Invest for the long term as in short-term market is very volatile.
- Seek help from professionals and investment advisors and never follow tips.
Few Things that Beginners should Never do in Investment Market
- Don't invest more than 50% of saving in equities inclusive of mutual funds.
- Don't invest blindly in thematic funds; better to stay away as beginners.
- Neither do panic selling nor panic buying.
- Don't invest in only 3-4 stocks. Better to diversify in at least 15-20 stocks.
- Don't make equity as a source of quick money; it doesn't work like that.
- Stay away from trading options and futures, however lucrative they may seem.
- Do not try to average down when a stock falls for fundamental reasons, as a correction that starts with 10% can be brutal and lead to more than 50% correction in any stock.
- In stocks, don't sit on your losses expecting the stock to return at your buying price; if the company's fundamentals are deteriorating, cut your losses.
- Don't invest in stocks or mutual funds for less than 3-5 years.
- Finally, don't take leverage/ loans/margin money to buy stocks or mutual funds.
Final Thoughts
It is essential to know yourself, your risk-taking appetite, investment style that suits you. Therefore it is better to spend the first few years reading books, doing courses, gathering knowledge, SIPing in Mutual funds, and knowing yourself.
After a few years, one can choose if they want to invest directly in stocks and what kind of stock or in Mutual Funds.
Spending time in the market and going through a cycle provides an investor with the complete picture; till then, mutual fund SIP Sahi hai.
The above conservative methods, systematic approach, and caution should not scare you from equity markets. Accept the reality of equity investing and take advantage of the risk and reward it provides.
Equity investment creates higher returns and makes you rich, but it takes time, patience, correct temperaments, discipline, and a regular source of income to feed the SIP.
(Disclaimer: This article is only for educational purposes and not investment advice. I am not a SEBI registered Financial advisor; please consult your financial advisor before investing in any stocks or mutual funds.)
List of Books for Further Reference:
- The Star represents spirituality and freedom.
- The circle represents completeness, unity, and integrity.
- Square represents stability and balance.
- The upward triangle represents the soul's movement toward the divine, and
- The downward triangle represents Prakriti.
Did you know?
Patachitra art is also very famous and part of the Culture in Orissa. Odisha’s Pattachitra is a centuries-old folk art style from rural Orissa based on Hindu mythology and mainly inspired by Jagannath and the Vaishnava sect.
Jammu Navani
Rajiv has worked for more than 15 years with Big 4 and other Multinational companies such as KPMG, EY and C&W in research and consulting role. His educational qualifications include BTech from NIT Nagpur and Masters in Construction Management. Apart from his primary expertise in real estate business, he is passionate about personal finance and stock markets. He is avid reader and researcher who enjoys sharing his learnings in the field of personal finance and capital markets.
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